Checkout Time: Once-Hot Hotel Deals Cool

By KRIS HUDSON and ANTON TROIANOVSKI On Tuesday morning, time-share salesman Albert Mora was waiting to meet potential buyers of a Tahiti Village time-share for a tour of the Las Vegas property when a fellow employee got a cryptic call from headquarters to turn away all buyers. Staff members scurried down the stairs with bundles of cash to return deposits of those being given tours. Later in the day, Mr. Mora learned that Tahiti Village's owner, Consolidated Resorts Inc., which is owned by a Goldman Sachs Group Inc. real-estate fund, was filing for bankruptcy-court protection. Managers of the fund, part of Goldman's Whitehall real-estate private-equity franchise, had decided to walk away from the $372 million investment, two years after the deal closed. The chaotic fall of time-share developer Consolidated is the latest example of how Wall Street's foray into the lodging industry is turning out to be a big bust. Just a few years ago, investors were paying top dollar to acquire hospitality companies on the assumption that demand for time-shares, room rates and travel budgets would continue to rise for the foreseeable future. After all, they reasoned, the industry rebounded quickly after the terrorist attacks on Sept. 11, 2001. In a prepared statement Tuesday, Consolidated said it planned to file for bankruptcy protection because of a lending environment that "has made it impossible to continue this company." The country's biggest time-share developers also have seen their business sputter. At Wyndham Worldwide Corp., the biggest time-share developer in the U.S., "vacation ownership" sales plunged to $280 million in the first quarter of 2009, down 39% from a year earlier. Marriott International Inc. reported a first-quarter operating loss of $17 million in its time-share business. Now, travel budgets are being slashed and room rates are falling, leaving some hotels without enough cash flow to cover their expenses. In the first five months of this year, U.S. hotel occupancy declined to 53%, the lowest total since Smith Travel Research began tracking the figures in 1987. Revenue per available room, on average, has declined to $52.78 so far this year, the lowest tally since 2004. While all types of hotels are struggling in this recession -- from luxury to budget, from big to small -- the most imperiled are hotel chains that own lots of real estate and were purchased at the top of the market from 2005 to 2008, with substantial debt. Twenty of the largest hotel buyouts completed between 2005 and 2008 amounted cumulative debt and equity payments of more than $60 billion. Among them: Blackstone Group LP's $26 billion purchase of Hilton Hotels, Lightstone Group's $8 billion purchase of Extended Stay Hotels and the $2.2 billion purchase of Equity Inns Inc. by Goldman's Whitehall. While not all of those deals are in danger of collapsing, many are troubled. "If you bought a hotel in 2007 and leveraged it to 80% or greater, you just have a huge challenge on your hands," said Bruce Ford, senior vice president of Lodging Econometrics, a hotel-industry research company. In turn, defaults on hotel loans have risen sharply. Defaults of securitized mortgages -- mortgages chopped up and sold to investors as bonds -- with hotels pledged as collateral likely will rise from the current 4.7% rate to exceed 8% by year end, according to Morgan Stanley. Already this year, Extended Stay filed for bankruptcy June 15; Red Roof Inn Inc. defaulted on $367 million of securitized mortgages this month, and Whitehall told investors in March it might need a cash infusion or to sell assets to pare Equity Inns' debt. Monty Bennett, chief executive of Ashford Hospitality Trust Inc., a real-estate investment trust that owns hotels, waded into the deal frenzy when Ashford bought 51 hotels as part of the break-up of fellow REIT CNL Hotels & Resorts Inc. in 2007. While the $2.4 billion Ashford paid was hefty, it was less on a comparative basis than buyers paid in many other hotel buyouts at the time, Mr. Bennett said. Ashford protected itself from high interest costs on the debt it used to buy the CNL hotels by replacing it with a floating-rate debt. Ashford also sold new shares to raise money to pay down the debt it incurred in the deal. Still, Ashford's stock is down 54% in the past year, though it has fared better than the stocks of other hotel REITs. —Lingling Wei contributed to this article. Write to Kris Hudson at kris.hudson@wsj.com and Anton Troianovski at anton.troianovski@wsj.com